It Should Cost the Germans and the Greeks Roughly the Same to Borrow

Reddit

Perth looks like it’s booming again. This is the fourth time since 2003 your editor has come out to the frontier of Australia’s resource boom to get the vibe in person. A shiny new glass building is going up just in front of our hotel on Hay Street. On Hay Street itself we can see the signs for Louis Vuiton, Yves St. Laurent, and Tiffany and Co. Who knew the miners were so well appointed? More on Perth in a moment.

But first, how about those yield spreads between 10-year Greek and German debt? They are now at 4.27%, the highest level since Europe’s monetary union began in 1999 according to Bloomberg. Now yield spreads aren’t the stuff of breakfast (or even dinner) conversation. But they do matter. Why?

Theoretically, it should cost the Germans and the Greeks roughly the same to borrow. Both governments use the same money and both economies have their interest rates set in Brussels by the European Central Bank. So why do the Greeks have to pay more to borrow for ten years than the Germans?

It’s the debt and deficits, to be sure. Greece is trying to get its fiscal house in order. And Germany is traditionally (or at least in the post-War era) Europe’s best steward of sound money policies. But for all of Europe (and America) these rising bond yields can be reduced to a much simpler explanation: you can’t get something for nothing.

Europe’s political and economic living arrangement – in which the State provides for an increasingly large share of private needs, wants, and dreams – is running smack into the brick wall of demography. Some people find it off putting to hear that the Social Welfare state – despite its best intentions to improve the human condition – is a Ponzi scheme funded by coercive taxation. But we reckon it’s true anyway.

The good news the State is just one of the institutions in a liberal society. There are other ways people can care, love, and empathise with one another. It doesn’t all have to be mediated by the civil service.

But modern government has grown so grotesquely fat and ubiquitous that an entire generation of Westerners have been trained to think only the government can and should solve problems. It’s like having an Uncle stuck in your living room who’s become too fat to move. You have to feed and clean and care for him and after awhile he becomes a living piece of inconvenient and intrusive furniture right smack in the middle of your life.

But cheer up. This will work itself out. The world is too complicated for a room full of well-meaning (or ambitious) men and women to manage it. Complex societies (or adaptive systems) cannot be managed by a handful of human brains. They can only be mismanaged.

In fact here’s a prediction: what happened to the Catholic Church in Europe in the 17th and 18th centuries will happen to the Nation State in the 21st. That is, the funding model which puts one institution at the centre of public and private life will break down. The institution will get too large, inefficient, slow, and greedy to do all the work it’s taken for itself.

This is a good thing. In economic terms, it up opens up new productive possibilities. Maybe all the world’s capital won’t be consumed by over-borrowing governments who are robbing from the future to win elections today. Or maybe it will. We’ll see soon enough.

Is there an investment story in today’s DR? Maybe. Gold is up 28% in the last year. Oil is up 75%. And silver is up 48%. They might go higher. But are they cheap? Probably not. As we said the other day (quoting our friend Rick Rule), with commodities you’re either a victim or a contrarian. Entering commodity stocks at these levels might be profitable. But it feels more like speculation on higher prices rather than investing based on tangible asset values that are cheap.

Speaking of which, there is a lot of vacant land in Australia. A lot. Flying across to Perth from Melbourne we looked out at the Great Australian Bight and wondered if anyone could ever live there, and what would they do if they did. Can resilient, decentralised communities that generate their own energy (and somehow find water) be a genuine alternative to having 65% of 21 million people living in the same large capital cities?

Who knows? But that’s a long, long way off anyway. The more immediate question is whether there’s anything worth buying on the stock market right now at these valuations and with this economy. Our take on it – published yesterday in the Australian Wealth Gameplan – is that now is a great time to become an 21st century energy baron. And it’s easier than you think.

Granted, the idea may be completely nuts. But if you want to avoid being a victim you have to buy stuff nobody wants now but may be worth something later. Radioactive mineral sands come to mind. They could become a new substitute for uranium in powering nuclear reactors. And with a fleet of cheap nuclear reactors you could build desalination plants and pipe water into Australia’s red centre and make it bloom like an oasis in the desert.

But less romantically, land prices also appreciate during a great inflation. And we think a great inflation is coming with a rising bond yields presaging currency collapses in Europe and America. We know this from some research we did on the birth of the industrial revolution in Britain in the 16th and 17th centuries.

The full story, for now, is only available to AWG subscribers. But the concept is simple: become a land banker. Mind you , you’re still doing this through the stock market and you’re still buying shares. And with shares you can lose everything. But owning a kind of call option that could profit from a long term energy trend AND the financial crisis coming round the bed seems possible to us, elegant even.

It could be rubbish too. But we’ll see. That’s why the stock market is not a savings account. You have to take risks to get rewarded.

What else can we say about Perth? Well there’s a lot more to say but we’ve run out of time and we forgot to bring a tie. It’s time to see what they cost on Hay street before we give our presentation today on why all libertarians should be institutionalised. Until Monday…

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
Reddit

Comments

  1. It costs Greece (a nation) 7% to borrow money from international money markets.
    My mortgage rate from Dec 1st 2009 has been 5.54%.
    I can only infer from this that my partner and I are a lower risk of default than the whole nation of Greece.

    Now that makes me feel …. valued, important, superior ……. or, alternatively, puts the state of Greek finances in perspective.

    And, they invented Gayness.

    Don’t believe me, check out: http://www.youtube.com/watch?v=aHh3ykPQEl4.

    Reply

Leave a Reply

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@dailyreckoning.com.au